Chapter 1

Duration Targeting and the Trendline Model

Duration Targeting

Most bond portfolios can be broadly classified as (1) buy and hold, (2) immunized, or (3) duration targeted (DT).

Buy and hold strategies are typically aimed at securing returns that closely match the initial yield value. In this case, they can be viewed as primarily having absolute return objectives.

Immunization strategies are intended to generate returns that match liabilities as rates shift, coupons reinvest, time passes, and the liability duration evolves. In essence, immunization also acts as an ultimate absolute return strategy in that it tries to immunize the initially promised return against changes in the structure of interest rates.

The very nature of both buy ...

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